Research Papers in Economics, Department of Economics, Stockholm University
Why are real interest rates so low? Evidence from a structural VAR with sign restrictions
Abstract: Numerous explanations for the low World real interest rate
have been discussed in the literature, but only a handful of studies
attempt to disentangle the relative importance of the different factors.
Sign restrictions are useful for analyzing this problem since shocks to the
supply of savings can be separated from shocks to investment demand using
the fact that these shocks have effects of opposite signs on the
equilibrium real interest rate. The bivariate model with only the real
interest rate and investment indicates that shocks to investment demand
have been twice as important to the recent decline in real interest rates
as shocks to savings. When more shocks are included, we find that 1.26
percent of the low real interest rate 2012-2015 is due to negative business
cycle shocks and 1.11 percent is due to low productivity. According to
these structural VARs with sign restrictions, high savings has not been a
major factor behind the recent decline in World real interest rates.
Keywords: Real interest rate; sign restrictions; global savings and investment; (follow links to similar papers)
JEL-Codes: E43; E44; (follow links to similar papers)
26 pages, October 27, 2017
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